Bay Area Rents collapsing

44 Replies

My tenant decided to move out from my rivermark condo in santa clara . I used to easily find tenants for $2700 ( 1 bed , 1 bath) . However its been 2 weeks and inspite of me lowering rents to $2350 I am not even getting a inquiry . for the first time i have posted on multiple forums zillow,zumper instead of my regular craigslist ad .

I had seen it in the news but experiencing first hand is convincing .

Though i am not happy about it, the prospect that rents are collapsing made me excited about the buying opportunity in multifamily that is coming in bay area . At this rate by December NOI and valuations should drop by 25% . Any thoughts ? I don't see much excitement about it in the forums yet .

No, it will not collapse 25% by December as you can see by real estate trends (not sure if it is exciting at all if it happens). Now there are no new employees/interns etc. coming down here to join tech firms. There will be slowdown in areas like Santa Clara or bay area in general. That will be mostly passing phenomenon and will bounce back once firms reopen next year. Some companies might make it long lasting, but that will be a much smaller fraction. What will be the effect on real estate market is yet to see. There is little more uncertainty

Rents will not collapse by 25% by December. From an immediate standpoint,...yes there are less folks renting in certain areas.....except Section 8 tenants. My experience has been that you get those at market rate or very close to it in multiple areas. 

Sid, I look at OM's for bay area apartment buildings everyday and as much as I want values to decline and metrics to compress so that I can buy, I am not seeing a significant decline in values or NOI's at this time. There are a few reasons for this, first is that depending on the city, rent control has kept rents low so many times a turnover of a unit will actually increase NOI and gross rents even during these times. These mom and pop apartment buildings are older stock now also subject to state wide rent control and many are mismanaged with below market rate rents so turnover is a net benefit to them as well. I also look for value add buildings so rent roll would be far below market anyway and not affected by declining rent. Through my network and reviewing OM's, I am not seeing much COVID hardship with tenants so NOI's havent fallen that much due to it. Finally, good buildings fairly valued are still being purchased quickly, with low interest rates as investors are searching for yield and taking advantage of debt in the 3s and even in the 2s in some rare instances.

Those buildings not subject to rent control are new construction apartment buildings which has rents all at market rate before COVID and I know those are hurting in SF now. So your logic actually applies to a REIT like Avalon Bay who owns new construction buildings with no rent control and pushed rents considerably higher in the past years with a stock that now trades 36% lower than pre COVID. Your logic also applies to a building that has previously all market rate rents but those are rare and usually not the greatest purchase because there is no value add component.

However, real estate does not move as fast as the stock market so I think there will be some opportunities in the future but not as significant as your line of thinking. There has been some price declines on older buildings in SF but they started off with high listing prices and are coming back down to earth. There are still deals to be had and I know investors still picking up assets at great prices. They are not day one cash cows but that is not the play here in the bay area anyways.

@Johnson H. thanks for the analysis . need to start ur meetup virtually again .

YEs by december i was being aggressive but the rate at which rents are down is surprising . whatever the reason maybe ( Telecommute, lay off) . I am not sure if this is temporary , time will tell . such trends take time to come and reverse .Sfo is down around 15% already from peak. Good analysis of net turn over being good for landlords never thought so many apts are below market rate .

I still do believe its time to look around december time frame as even the rent moratorium must be hurting some mom and pop landlords who will be in trouble if 30% of their tenant base is not paying for 6 months and be in a hurry  to opt out .  I am just looking where would be the best place to deploy cash and with regular housing not impacted looks like multifamily is the place to watch and that too in bay area or NY as rest of the country seems to be doing fine .

Originally posted by @Sid Naik :

@Johnson H. thanks for the analysis . need to start ur meetup virtually again .

YEs by december i was being aggressive but the rate at which rents are down is surprising . whatever the reason maybe ( Telecommute, lay off) . I am not sure if this is temporary , time will tell . such trends take time to come and reverse .Sfo is down around 15% already from peak. Good analysis of net turn over being good for landlords never thought so many apts are below market rate .

I still do believe its time to look around december time frame as even the rent moratorium must be hurting some mom and pop landlords who will be in trouble if 30% of their tenant base is not paying for 6 months and be in a hurry  to opt out .  I am just looking where would be the best place to deploy cash and with regular housing not impacted looks like multifamily is the place to watch and that too in bay area or NY as rest of the country seems to be doing fine .

Once in awhile I do see properties that are hurting. One recently I saw a 12 unit building in rough shape with 2 vacancies, 1 not paying renter, 2 late pay but catching up and the rest with low paying renters. The location was outstanding and the listing agent listed the property very low so it went to an multiple offer situation. You may think this is a terrible situation but I loved the building and opportunity to turn around the building and there is so much intrinsic value with the property. However, I had several banks back out after hearing about the collections issues and I decided to not put an offer on it. I'm sure a high net worth individual backing a loan, someone using a hard money loan, or someone paying all cash (pretty common) is buying this $3M+ building. That is another problem as well, there is so much money waiting on the sidelines to enter into the market and invest. I have had many folks wanting to invest with me on buildings but I am so picky that my deal flow is low so there is more money than deals which is another reason I find it hard to think values will go down 25% (but it would be great if it did!). There is so much money in the Bay Area, especially now with all the IPOs and tech stocks being sky high, people take some of that money out and buy bay area real estate and also support out of state house prices haha.

Over the past decade, lots of young people have moved into SF and Silicon Valley for work putting up with the commute and high living costs for the fun and excitement of life here and the job opportunities of terrific tech companies. This is no longer the case now but I'm sure it will rebound again as there are downsides to working from home and young people want to socialize with others not just at work but after work as well. The new housing stock these past few years have been these new and expensive apartment buildings around the financial district of SF and renters put up with it so that they could walk to work. Now they don't need to walk to work so they are leaving for either cheaper areas of the city or out of the city all together. In addition, many of these folks are leaving these high price apartments and buying SFH in the Bay Area as they want the outdoor space and an home office which compounded with the lack of inventory are keep values stable. I would not be surprised once there is certainty around this pandemic, people will trickle back into the city again.

As for a virtual meetup, for some reason I don't have much interest in running one. Maybe this will change as this pandemic drags on but @Sean Pan has been running a virtual meetup successfully these days, I would encourage you to join his meetup. 

Thanks for the shoutout @Johnson H. ! @Sid Naik I agree that rents won't drop by 25% across the board, but we are also having a hard time renting out some of the older stock in San Jose and Sunnyvale (on the property management side). Feel free to drop by our virtual meetups! We meet at least once a month (avg 35 attendees) for 2 hours of pure networking.

Yes, rents have quickly softened / dropped since a year ago, really accelerating since June of this year.

Unscientifically, I'd say 8-15% depending on area of the Bay Area.

If you have a vacancy right now, best I can suggest is aggressively lower your rent to a very attractable rate compared to your competition and get a tenant.  Don't try to catch a falling knife as they say.

Agreeing with Chad Hale...............If you're having a hard time renting the property out...consider dropping the amount you are asking.

@Brian Garlington and @Chad Hale . yes dropping rent that is exactly what I have done .

Its ok for me since it is only 1 unit but think of the mom and pop multifamily owner who has to drop rents for 10 units . I am waiting for that opportunity .  a lot of owners will be largely be unaffacted as Johnson mentioned . some will wilt and sell , some will accept lower valuations .
we need to wait till that happens and by the data looks like it will happen first in bay area which is leading the rent drop in the nation by a large margin .

@Johnson H. is doing an awesome job explaining a lot of what is going on. @Sid Naik without knowing more, it could be the complex/unit/etc. I will say some of the smaller stuff is struggling a tad more, and also little things (think shared laundry vs in unit). Right now there are just some things that people are opting to want a bit more (maybe 1+ bed so there is an office vs. a studio). To be fair, this is also not the most prime time to place a tenant (not terrible, but there are better seasons). So could just be getting hit from a lot of angles at once. Gets back to the product (not saying this is the case for your condo) but during good times people always think "oh shared laundry isn't that bad of a situation" or some other item like that. You see it pan out when people get to be a bit more selective with their buying/rental options

@Sid Naik keep in mind that suckitsite (sic) is run by a pretty biased person with an axe to grind. As for San Francisco rent drops, again it depends on the neighborhood, unit size and amenities. Certainty new construction high rises In DT and SOMA are taking a big hit (like 20-25%) but others are much less, to the tune of 5-7%. I also think this winter will be the nadir, and spring 2021 will improve. Basically some of the LL’s in denial this summer are now getting desperate, so the rental market is particularly soft now with that hangover inventory. But hopefully that inventory will work itself down, and spring 2021 will be an improvement. (I’m glad I got my rent reduction sh!t together pronto this summer, and filled my vacancies without waiting too long ;) 

@Sid Naik the title of your post and your situation are not in alignment. Bay Area rents are not collapsing across all asset classes. It is getting soft in higher end assets. 

I am one of the examples that @Johnson H. references. I have been able to strategically increase rents in Mountain View, North Oakland and soon Fruitvale. Fruitvale will see the most upside on a percentage basis. As these lower paying tenants move out on their own, I am able to reposition the units and see a substantial upside. Therefore, I expect to see much better NOI and overall valuation in 2021.

Much of the news and hype is centered around people who got into REI very recently and bought a higher class asset and had not anticipated a down swing. They were overly focused on getting into the market and did not build in a down turn into their modeling. There are a ton of guys on BP who have been stacking paper since before COVID in anticipation of a correction. There might be a very small window to grab some distressed deals. But I believe the amount of money on the sidelines will lift prices up very quickly and we won't see a 25% fall this year.

@Arlen Chou   To be frank , I have not done any multifamily transaction so far .However the opportunity I see may be coming is from small time landlords  who have bought in the last 2 years at rents and valuations  20% more and if they have to sell for some reason , they will need to lower their price from what they bought . Isn't that a correction ? If i were to buy same MF last year i would have to pay 20% more . 

cnbc article also showing 20% drop in rents .

https://www.cnbc.com/2020/10/0...


@Johnson H.

I agree there are long term landlords who are having tenants paying below market rate .

IF they were to sell the property for whatever reason won't they be asking valuations based on current rents ? Of course you may have to factor in the payment to the tenant to move out .

Also agree on the comment that bay area is flush with cash . so ur saying people would buy at higher valuations by lowering the cap rate ? as NOI is going to be lower due to rent correction than last year

basic questions but just trying to understand the logic .

Originally posted by @Sid Naik :

@Johnson H.

I agree there are long term landlords who are having tenants paying below market rate .

IF they were to sell the property for whatever reason won't they be asking valuations based on current rents ? Of course you may have to factor in the payment to the tenant to move out .

Also agree on the comment that bay area is flush with cash . so ur saying people would buy at higher valuations by lowering the cap rate ? as NOI is going to be lower due to rent correction than last year

basic questions but just trying to understand the logic .

Sid, sellers and agents have a range of ideas of what a property is worth. Most of the time, properties are priced at actual/current rents and agents also list a proforma of the property if all rents are at market rate. Sometimes properties are listed with vacant units and agents would put the market rate for that unit in the actual column. However, that could be market rate rent in as-is condition, market rate rent in a fully rehabed condition, or some number that is just plain wrong that is too high or too low. Once in a rare while, I dont even see a future rent number listed on a vacant unit which lowers the cap rate and GRM significantly so you have to do your due diligence to uncover a gem. Recently, I helped a friend uncover property taxes listed $10k+ higher than what it should be on the OM which made a good deal into a better one.

My comment about the bay area being flush with cash is that buyers will continue to set up and buy which will allow for a soft landing for values where rents have been hit the hardest at this time. All bets are off if the tech sector gets hit hard with massive layoffs or there is a full blown recession. A good example is that I recently saw a building in SF sell for $3M+ for cash and I thought it was a great deal since it was 1990s construction. You may ask why would anyone pay all cash for a building. Investors have different reasons for buying. Maybe instead of keeping that money earning nothing at the bank, they put it in a property, get a decent yield and the tax benefits. Some buy property to pass it down to their kids. Maybe they will get a loan down the road. Another could be that they are doing a 1031x and decided to downsize and just buy with all cash. Or they just think they got a great deal and will sit tight for awhile and flip it later. In any case, paying all cash gives the new buyers a ton of holding power and peace of mind.

It is difficult to time the market to buy at the lows, I was lucky to start buying in 2010 but that was more luck than skill. If you see a good deal, buy and hold a building with upside and the bay area market will reward you in the long run based on history.

Thanks all for the great comments . Appreciate it .

This is my 4th week trying to rent my condo. The condo is top notch , trust me on this , there is nothing wrong in product ( location, amenities ,age all ticked off ) .the neighboring huge apartment complex has reduced rents by 25% and on top of that 1 month rent free . This is in one of the best area in santa clara ( Rivermark) .If you look at online stats there is realignment where rents are dropping in high demand expensive areas and increasing in areas like livermore . If a property comes to sell in Santa clara it will be priced on the prevailing rents and cap rate . From what Jonathan is saying people may bid up this price so it won't be strictly based of cap rate and NOI . Kind of hard to understand the logic but I am a newbie in MF so can't comment much on it . However rent drop is nothing i have seen in Santa clara for the last 10 years and is real .

Hi Sid, 

Rents in Santa Clara, Silicon Valley and South Bay are undeniably on the decline. I was just looking at rental listings last night in Mountain View out of curiosity. Although I expected to see a decline it surprised me just how much it has declined. I noticed a few months ago many vacancy signs out, something I had not seen in years. Now there are move-in incentives, low deposits, offers of as much as 2 months free rent even.

Last year all the new apartment developments in the area gave me cause for concern. With the sheer volume of new rental apartments I was concerned that IF the rental market took a turn I would not be able to get a tenant at my current rental rate in my older condo. And... that turn came faster than I imagined. I followed my gut instinct and sold in February with escrow closing just before SIP began. Lucky timing. I 1031 my single condo into a 4 unit in the Central Valley. There was a $5K difference from the sale price to the purchase price, but the rental income increased almost 2.5x. I'm very pleased with how it turned out.

I held that Mountain View condo for appreciation. It never really made sense to hold it for cashflow. Maybe 10 years from now it would have seen (another) huge appreciation, who knows, but my goals have changed and I'm looking for cashflow now. I have another condo in the tri-valley I'm debating on making the same move with, but there are other considerations in play on this one. 

Rivermark is a great location, but there are a lot of rentals in that area. How long can you afford to leave it vacant and hang on for the market to head back to a favorable direction? How low can you go on the rent before it's costing you out of pocket every month to hang onto it? Just some things to consider.

Originally posted by @Sid Naik :

Thanks all for the great comments . Appreciate it .

This is my 4th week trying to rent my condo. The condo is top notch , trust me on this , there is nothing wrong in product ( location, amenities ,age all ticked off ) .the neighboring huge apartment complex has reduced rents by 25% and on top of that 1 month rent free . This is in one of the best area in santa clara ( Rivermark) .If you look at online stats there is realignment where rents are dropping in high demand expensive areas and increasing in areas like livermore . If a property comes to sell in Santa clara it will be priced on the prevailing rents and cap rate . From what Jonathan is saying people may bid up this price so it won't be strictly based of cap rate and NOI . Kind of hard to understand the logic but I am a newbie in MF so can't comment much on it . However rent drop is nothing i have seen in Santa clara for the last 10 years and is real .

 

@Maria D'Aura That is exactly what i am talking about . The rent drop is obvious at least in santa clara .  however as you timed market and moved out I am waiting to buy more here as I am expecting the valuations to drop for Multifamily which are dependent on rental income . but not everyone agrees here that valuations will drop even though rents have fallen .

@Sid Naik

Curious what makes you think MF prices will drop?

Are you looking at 1-4 units or 5+ multifamily? In Santa Clara?

I can tell you since I bought the 4 unit in Central Valley in March a few similar ones have sold since at more than 10% more than I paid and the current rents are lower than mine was. I too was expecting prices to come down and put in offers to buy another. So far I’ve been out bid on each one I’ve tried so far.

5+ multifamily in Santa clara . 

MF ( 5+ units ) valuations are dependent on the rent prices which are declining . That's my reasoning but going by Jonathan's answers there is lot of money in bay area and they will ignore the income valuation and bid for higher prices .

below 5 unit are dependent on comps and those properties i don't reason for decline yet , in fact SFH are dong quite well actually .

I finally managed to rent my unit for 20% less . Below article from bloomberg citing 31% down in sfo , 19% down in santa clara ( which is correct from my first hand experience) .

https://www.bloomberg.com/news...

If commercial properties are based on NOI and cap rate logic then the price has to come down ? 31% NOI down in sfo and price not coming down does not seem logically to me . Maybe transactions are not happening as landlords will be in denial too for some time so difficult to get data on that front so soon .

Again this is specific to multifamily ( 5+units) not for individual homes .

@Sid Naik , congrats on getting your condo rented but tough to hear you had to take 20% less. When the market rebounds again, you will be able to make it up I'm sure.

I was wondering who was Jonathan on this thread but I guess you mean me haha. I am not saying MFH won't drop, I am saying it won't drop 25% that quickly and we might not get to a 25% drop either because there is a lot of money waiting on the sidelines just like you waiting to buy.

I am seeing some mixed use properties in SF having some price reductions as it is probably a difficult time to lease out ground floor commercial in many areas of the city. Pure MFH is getting a little slow but sellers aren't motivated yet. I still think those headline numbers of 31% down in SF are for the new luxury apartment buildings especially studios and doesn't include move in incentives but those are not the buildings us mom and pop buyers are in the market to buy.

Are you seeing any properties on the market with price reductions due to NOI declining? I haven't...yet!